The U.S. economy grew at a faster-than-anticipated pace in the second half of 2013, led by buoyant domes-tic demand, robust inventory accumulation, and strong export growth. Although the harsher-than-usual winter weather may have slowed activity in early 2014, the underlying fundamentals of private demand remain strong, and growth is expected to advance at an above-potential rate for the rest of this year. In Canada, annual growth is expected to accelerate in 2014 thanks to stronger external demand and rising business investment.
Growth in the United States was 1.9 percent in 2013, with the continued recovery of private domestic
Less than 0 Between 0 and 1 Between 1 and 2 Between 2 and 4 Between 4 and 6 Greater than or equal to 6 Insufficient data 1. 2014 GDP Growth Forecasts1
(percent)
2. Effects of a Plausible Downside Scenario
(peak growth deviation from 2014 baseline projections; percentage points)
Very large (greater than 0.75)
Large (between 0.60 and 0.75)
Moderate (between 0.40 and 0.60)
Small (between 0.20 and 0.40)
Minimal (less than or equal to 0.20) Insufficient data Decrease in growth:
Figure 2.1. 2014 GDP Growth Forecasts and the Effects of a Plausible Downside Scenario
Source: IMF staff estimates.
Note: Simulations are conducted using the IMF’s Flexible System of Global Models, with 29 individual countries and eight regions (other European Union, other advanced economies, emerging Asia, newly industrialized Asia, Latin America, Middle East and North Africa, sub-Saharan Africa, oil exporters group). Countries not included in the model are allocated to the regions based on the WEO classification of fuel exporters, followed by geographical regional classifications. Syria is excluded due to the uncertain political situation. Ukraine is excluded due to the ongoing crisis.
1The data for Argentina are officially reported data. The IMF has, however, issued a declaration of censure and called on Argentina to adopt remedial measures to address the quality of the official GDP data. Alternative data sources have shown significantly lower real growth than the official data since 2008. In this context, the Fund is also using alternative estimates of GDP growth for the surveillance of macroeconomic developments in Argentina. The Zimbabwe dollar ceased circulating in early 2009. Data are based on IMF staff estimates of price and exchange rate developments in U.S. dollars. IMF staff estimates of U.S. dollar values may differ from authorities’ estimates. Real GDP is in constant 2009 prices.
age points from GDP growth. Economic momentum picked up during 2013; GDP grew at an average annu-alized rate of 3.3 percent in the second half compared with 1.2 percent in the irst half. Consumer spending also picked up, boosted by higher house and stock prices and a further decline in household debt relative to disposable income, which raised household net worth above its long-term average (Figure 2.2). A faster pace of inventory accumulation and strong export growth (particularly in regard to petroleum products) also contributed to sustained activity in the second half of 2013. Mainly relecting the October government shutdown, government spending contracted signii-cantly at the end of the year, but inancial conditions remained highly accommodative, with long-term rates declining after the sharp increase in mid-2013. he unemployment rate continued to fall in 2013, reaching 6.7 percent in February 2014. However, a major fac-tor behind the decline was a further drop in the labor force participation rate, which stood at 63 percent in February of this year (see Chapter 1). Still-ample slack in the economy was manifest in subdued price pressures, with headline consumer price index inlation standing at 1.6 percent in February 2014. Largely on account of increases in domestic energy production and the associated drop in oil imports, the current account deicit narrowed further to 2.3 percent of GDP in 2013—the lowest in 15 years (Table 2.1).
he unusually harsh winter weather weighed on activity in early 2014, but growth is expected to rebound over the rest of the year—driven by strong growth in residential investment (bouncing back from very low levels and given substantial pent-up demand for housing), solid personal consumption, and a pickup in nonresidential ixed-investment growth as consumer and business conidence improves. Growth will also be supported by less iscal drag, which is declining to ¼ to ½ percentage point of GDP this year, thanks in part to the Bipartisan Budget Act, which replaced some of the automatic spending cuts in iscal years 2014 and 2015 with back-loaded sav-ings. he debt limit has been suspended until March 2015, reducing the uncertainty that has characterized iscal policy in the past few years. Overall, growth is projected to accelerate to 2.8 percent in 2014 and to 3.0 percent in 2015.
–2 –1 0 1 2 3 4 5
2010–11 12–13 14–15 2010–11 12–13 14–15
300 400 500 600 700 800
40 70 100 130 160 190 220 250
2006 08 10 12 13:
Q4 4. Household Net Worth
and Debt (percent of disposable income)
–15 –10 –5 0 5 10 15 20
40 60 80 100 120 140 160 180 200
2006 08 10 12 Jan.
14 61 62 63 64 65 66 67 68 69
4 5 6 7 8 9 10 11 12 13
2008 09 10 11 12 Feb.
14
200 600 1,000 1,400 1,800 2,200 2,600 3,000
2005 07 09 11 Dec.
13 1. Real Activity Indicators
(percent change)
3. House and Equity Prices1
5. U.S. Household Formation
(thousand units; annu-alized; four-quarter moving average)
2. U.S. Labor Market (percent) Priv. cons. Net exports
U.S. CAN
–3 –2 –1 0 1 2 3 4
2007 09 11 13 15
GDP growth
6. U.S. Fiscal Impulse2 (percent of GDP)
U.S. net worth CAN net worth Labor force participation rate
Unemployment rate (right scale)
U.S. FHFA HPI CAN MLS HPI
S&P 500 S&P/TSX Right scale:
U.S. household debt CAN household debt Right scale:
Household formation precrisis average Priv. nonres. inv.
Priv. res. inv.
Sources: Bloomberg, L.P.; Canadian Real Estate Association; Congressional Budget Office; Haver Analytics; and IMF staff estimates.
Note: CAN = Canada; cons. = consumption; FHFA HPI = Federal Housing Finance Agency Housing Price Index; inv. = investment; MLS HPI = Multiple Listing Service Housing Price Index; nonres. = nonresidential; priv. = private; res. = residential; S&P = Standard & Poor’s; TSX = Toronto Stock Exchange.
1Year-over-year percent change for house prices and index; January 2005 = 100 for S&P and TSX.
2The fiscal impulse is the negative of the change in the primary structural balance.
In the United States, growth in 2013 was higher than expected, and recent data remain consistent with a further pickup in 2014 as improvement in the labor and housing markets continues and the fiscal drag wanes. In Canada, growth strengthened in 2013 and is expected to accelerate in 2014 as a result of rising business investment and firming external demand.
he balance of risks is tilted slightly to the down-side. On the external front, protracted sluggishness in the euro area would weigh on growth, particularly if delation dynamics take hold. A slowdown in emerg-ing market economies could also pose a risk, with output growth declining by 0.2 percentage point in response to a 1 percent reduction in those economies’
GDP (see this chapter’s Spillover Feature). On the domestic front, private domestic demand could also lose momentum if long-term yields rise more quickly than expected without an associated improvement in the outlook. In the medium term, heightened iscal sustainability concerns could pose additional downside risks, while a continuation of the downward trend in the labor force participation rate would further dent potential output and, by reducing the slack in the economy, lead to an earlier-than-expected tightening of monetary policy. On the upside, a more buoyant hous-ing market recovery, with feedback to and from lend-ing conditions, balance sheets, and private demand, remains a possibility. Moreover, greater conidence in the economy’s prospects (resulting from a relatively healthy inancial sector and low energy costs) could induce businesses to shift more aggressively from cash hoarding toward real investment.
A balanced, gradual, and credible iscal plan that puts public debt irmly on a downward path contin-ues to be the main policy priority. Such a plan would involve measures to gradually rein in entitlement spending, a revenue-raising tax reform, and replace-ment of the sequester cuts with back-loaded new
rev-enues and mandatory savings. (he Bipartisan Budget Act is a modest step in this direction.) Although the continued economic momentum justiies the mea-sured reductions in the Federal Reserve’s asset purchase program, the overall monetary policy stance should remain accommodative, considering the sizable slack and steady inlation expectations (see Chapter 1). he return to qualitative forward guidance in March 2014 can provide the Federal Reserve with greater lexibility to achieve its employment and inlation goals. As the date of the liftof draws nearer, the Federal Reserve will have to clearly convey to the market how it will assess progress toward achieving those objectives, in order to avoid an increase in policy uncertainty.
Canada’s economy strengthened in 2013, but the much-needed rebalancing from household consump-tion and residential construcconsump-tion toward exports and business investment has not fully materialized. Growth is expected to rise to 2.3 percent in 2014, up from 2 percent in 2013, with the projected pickup in the U.S. economy boosting Canada’s export and business investment growth (Table 2.1, Figure 2.2). Although external demand could surprise on the upside, downside risks to the outlook still dominate, includ-ing from weaker-than-expected exports resultinclud-ing from competitiveness challenges, lower commodity prices, and a more abrupt unwinding of domestic imbalances.
Indeed, despite the recent moderation in the housing market, elevated household leverage and house prices remain a key vulnerability (Figure 2.2). With inla-tion low and downside risks looming, monetary policy Table 2.1. Selected Advanced Economies: Real GDP, Consumer Prices, Current Account Balance, and
Unemployment
(Annual percent change unless noted otherwise)
Real GDP Consumer Prices1 Current Account Balance2 Unemployment3 2013
Projections
2013
Projections
2013
Projections
2013
Projections
2014 2015 2014 2015 2014 2015 2014 2015
Advanced Economies 1.3 2.2 2.3 1.4 1.5 1.6 0.4 0.5 0.4 7.9 7.5 7.3
United States 1.9 2.8 3.0 1.5 1.4 1.6 –2.3 –2.2 –2.6 7.4 6.4 6.2
Euro Area4,5 –0.5 1.2 1.5 1.3 0.9 1.2 2.3 2.4 2.5 12.1 11.9 11.6
Japan 1.5 1.4 1.0 0.4 2.8 1.7 0.7 1.2 1.3 4.0 3.9 3.9
United Kingdom4 1.8 2.9 2.5 2.6 1.9 1.9 –3.3 –2.7 –2.2 7.6 6.9 6.6
Canada 2.0 2.3 2.4 1.0 1.5 1.9 –3.2 –2.6 –2.5 7.1 7.0 6.9
Other Advanced Economies6 2.3 3.0 3.2 1.5 1.8 2.4 4.8 4.7 4.3 4.6 4.6 4.5
Note: Data for some countries are based on fiscal years. Please refer to Table F in the Statistical Appendix for a complete list of the reference periods for each country.
1Movements in consumer prices are shown as annual averages. Year-end to year-end changes can be found in Table A6 in the Statistical Appendix.
2Percent of GDP.
3Percent. National definitions of unemployment may differ.
4Based on Eurostat’s harmonized index of consumer prices.
5Excludes Latvia. Current account position corrected for reporting discrepancies in intra-area transactions.
6Excludes the G7 (Canada, France, Germany, Italy, Japan, United Kingdom, United States) and euro area countries but includes Latvia.
balance between supporting growth and rebuilding iscal bufers, especially at the federal government level, with less room to maneuver at the provincial level.